Evaluating Claims Costs Arising out of Political Disorder and Civil Unrest

1. Evaluating Claims Costs Arising out of Political Disorder and Civil Unrest George Maher John Ryan

2. What is this all about? • Focussed on the business political and social issues • and how to make a number out of that • Helping people make decisions they didn’t think they could make • Point is to enable people to crystalise thinking which often is dominated by irrational fears • The actuary has a key role

3. Coverage • Worldwide, most insurance policies exclude • Mutiny, civil commotion amounting to a popular rising, military rising • Insurrection, rebellion, revolution, state of siege, martial law • Terrorism (violence for political ends and violence for instilling fear in the public) • War • In some cases, these losses are covered if they are caused independently from any Government action • Where cover is required due to the perceived high levels of risk, it is provided by • traditional insurers, with various constraints • special purpose insurance vehicles, with greater success and robustness

4. Removal of coverage has social/economic implications • Withdrawal of housing finance • in areas of perceived high risk • usually affects poorer sections more • Hindering entrepreneurial activity • small business withdraw from/do not set up in targeted areas • Deteriorating conditions in targeted area • as wealthier sections leave • Reduction in foreign investment

5. The Rôle of the Actuary • Possible exposures Policy Limit (US$ billions) Region 1: 1.2 Region 2: 1.5 Region 3: 2.6 Region 4: 3.1 Region 5: 1.0 _____ Total exposure 9.4 Total reserves 0.8 • “Reserve is insufficient” • The process is stuck

6. The Role of the Actuary • The actuary is able to deal with uncertainties and is not looking for certainty • Can bring external data and rigorous analysis to identify and quantify what could happen • Conclusion may be ‘The largest scenario we can find is US$0.3 billion’. • But reserve requirement may be more than that to ensure pool can continue after deterioration • Financial modelling required

7. There has been an increase in major riot and terrorist events in the 1990s

8. With most insurance claims arising in the UK and the US

9. Organisation Pool Re SASRIA CESCE IFTRIC NASRIA Description Provides insurance for terrorism-related risks in the UK. It is ultimately government guaranteed Provide coverage for political and labour unrest. Previously was government guaranteed. Provides insurance for political and extraordinary risks on an exclusive basis in Spain. It is government guaranteed. A government-owned insurance company which covers both political and trade risk in Israel NASRIA is the Namibian equivalent of SASRIA Pools established to deal with this include • Pools set up by Governments as commercial insurers view risks as too heavy for them to cover And provide funding mechanisms for possible reconstruction

10. Risk Transfer Mechanism SASRIA • SASRIA was established following the Soweto riots and the withdrawal of coverage by the domestic insurers • “Reserve” increased over the period • Business characterised by low loss ratio (20%) • SASRIA progressively: • reduced premium • Increased limit • Expanded coverage • But perception of risk remained high and reserves continued to expand

11. Risk Transfer Mechanism - Pool Re • Pool Re has similarities • Increasing surplus, reducing premiums and low loss ratios • Published surplus understated by accounting conventions

12. What are reserves? • Reserves can be large • SASRIA $1.5 billion reserve • Pool Re $1.2 billion reserve • But outstanding claims reserves are small • Reserves are established for • deterioration in conditions • possible major event • Pool must be able to withstand these • and continue to operate • The difficult question is how large should the reserves be?

13. Reserving Approach Modelling • Characteristics of events • Identification of Key Risk Factors • Analysis of Historical Experience • Review of Global Experience • Generation of Possible Scenarios Data • Analysis of claims in region • Analysis of world events • Reports on major situations • Study of social/economic/demographic/political conditions • Interviews

14. Characteristics • Terrorism • Small group of people • Highly organised • Generally focussed on property damage • Politically motivated • Riot • Large group of people • Disorganised and random • Limited timescale • Social (political) exclusion main motivator • Labour Unrest • Similar to riots but large duration • Require labour issue • Less public participation • May be difficult to differentiate from riot • Insurrection • Requires significant political unrest (and retaliatory action) • Larger scale duration • Typically massive destruction • Usually excluded from coverage

15. Identification of Key Risk Factors Factors might be • Failure of government to meet peoples expectations • whether reasonable or not • Failure of key component of infrastructure • Fall in the price of important commodity in producing company Purpose is to • Understand where things could go wrong in this region • Which parts of population might be disaffected

16. Labour Unrest Riot 1990 1999 Analysis of Historical Experience • Historical experience may give some insights No. of incidents • But often is of limited value

17. Analysis of Global Experience • The analysis of global events adds significant insight Demographics Insurance buying Property values Concentration Causation • What has happened elsewhere • What could happen here - but what are the differences

18. Analysis of Global Experience • For example

19. Generation of Possible Scenarios • What are areas of potential disturbance? • What are the areas of potential damage?

20. A2 B1 A1 A3 B2 Identification of major scenarios

21. Reserves also depend on policy conditions and reinsurance • Cover cancelable/or not? • Refusable or not? • Limits to cover (cause of loss or monetary)? • Limits to cover in the aggregate? • Reinsurance will become more expensive when conditions deteriorate • (may not be there when needed) • Following change in conditions can • Increase rates • Reduce limits

22. Calculation of Reserve Requirements

23. Calculation of Reserve Requirement